Understanding The Company Car
08 October 2010
Posted by: TaxFind ™
Understanding The Company Car?
The salary structuring landscape has evolved significantly in the past ten years.An employee has very little left in terms of structuring or tax saving.The commonly used quote from a ruling in 1935 between the Duke of Westminster and the Commissioner of The Inland Revenue ‘every man is entitled, if he can, to order his affairs so that tax under a tax status is less than it otherwise would be’ no longer holds the same lustre as it once did.
A taxable fringe benefit will arise where an employer has granted to an employee the right to use of a motor vehicle for his or her private or domestic purposes, free of charge, or for a consideration payable by the employee which is less than the value of such use.
Using a fixed percentage of the ‘determined value’ of the motor vehicle, less any consideration given by the employee for the use, is used as the basis of determining the taxable value to be placed on the private use of the employer provided motor vehicle.
The ‘determined value’ means:
The original cost to the employer (or associated institution in relation to the employer), excluding finance charges, interest, and value-added tax – where the purchase was a bona fide sale agreement at arm’s length; or where the vehicle is held by the employer (or associated institution in relation to the employer) under a lease and ownership passes to the employer on termination of the lease, either there tail market value of the vehicle at the date the employer first obtained the right of use, or the cash value excluding value-added tax as defined in the Value-Added Tax Act where the lease is an instalment credit agreement; or In any other case, the market value of the vehicle at the time when the employer (or associates institute in relation to the employer) first obtained the vehicle or the right of use.
The determined value is reduced by 15% depreciation (reducing balance method) for each completed 12-month period that the employer owned the vehicle prior to granting the use of such to the employee.
The value of private use, and therefore the taxable fringe benefit, of the motor vehicle is determined by using a rate of 2.5% of the determined value (4% for second vehicle or where the employee also receives a travel allowance).This taxable fringe benefit value is reduced by 0.22% if the employee bears the full cost of fuel used for private use, and 0.18% if the employee bears the full cost of maintenance of the vehicle, provided that the employee does not receive a travel allowance in regards to these costs.Commonly misunderstood is when the employee who received the benefit of a company car is travelling abroad and will for a month or two not be able to use the company car, the value of the private use of the vehicle should not be reduced, even if the vehicle is not in use for that period.The fringe benefit is currently based on the entitlement of use.However, where the private use for the year of assessment is less than 10 000 kilometres and accurate records have been kept, SARS may reduce the taxable value of the benefit on assessment.
The circumstances under which the taxable value of private use / fringe benefit is deemed to be nil are:
Where the vehicle is a pool car, generally used by the employees for business purposes and not allocated to one designated driver, provided that Any private use of the vehicle must be infrequent or merely incidental to the business use; and the vehicle is not normally kept at or near the residence of the employee when not in use or after business hours (and claiming that it’s not safe to leave the vehicle at the office and for that reasons is parked at the employee’s home is generally not accepted by SARS).
The nature of the employee’s duties are such that the employee is regularly required to use the company’s vehicle for the performance of those duties outside normal business hours, provided the employee is not permitted to use that vehicle for private purposes other than travelling between place of residence and place of work, or infrequent or incidental private use.Not to forget that SARS will expect the employer to prove that the employee was required to be on stand-by after hours or the nature of work required such use such as technical, engineering, or emergency services.
Following the February national budget speech and an endeavour to align the travel allowance provisions with that of employer provided motor vehicles the following proposed amendments where included in the Taxation Laws Amendment Bill (2010), effective from 1 March 2011:
The monthly taxable fringe benefit value for the first motor vehicle to increase from 2.5% to 4% of the determined value; The determined value of a motor vehicle will now include the cost of any maintenance plan and value-added tax; Employees’ tax with holding will be based on 80% of the taxable fringe benefit value (similar to travel allowance); The taxable fringe benefit value may be reduced on assessment by the actual business use, provided that a travel logbook has been maintained (similar to travel allowance); and Provisions to allow for offset of employee born costs and recognition of employer reimbursements on assessment.The increase of monthly taxable fringe benefit value from 2.5%to 4%, as well as the inclusion of the value-added tax to the determined value, would yield an 82.4% increase (assuming that the vehicle is mainly used for business purposes).
Based on the draft response document from National Treasury and SARS (issued 3 August 2010), the proposed changes to employer provided motor vehicles (as above) were revised.The proposed monthly taxable fringe benefit value will be reduced from the 4% to 3.5%.When a full maintenance plan is included in the purchase price, the monthly fringe benefit rate will be reduced from 3.5% to 3.25%, provided the maintenance plan must cover all maintenance expenses other than consumables (such as fuel, top up oil, and tyres). This will avoid potential double counting of the maintenance plans with will be included in the determined value.
As the employees’ tax with holding will prejudice employees that use the employer provided vehicle extensively for business travelling, it was proposed that employers be able to reduce the value that will be used for employees’ tax purposes from 2.8% (being 80% of the 3.5% fringe benefit rate) down to 0.7% where the employer can justify that the vehicle will not be used more than 20% for private purposes.The employer will become jointly liable for the short fall of tax when the employer does not have sufficient grounds to support such a reduction.
The proposed amendments have no transitional arrangements.This means that the new taxing provisions and rates will apply as from1 March 2011 if these proposals are promulgated in its current form later this year.This will extend the need to maintain a proper and accurate travel logbook to employees that receive the benefit of a company car and not just those who receive a travel allowance. Also, the typical company car scheme has policies and terms attached, such as the period of use and even the type of vehicle that the employee may select as a company car.The employer provided vehicle that the employee has allocated to him currently may in many cases be the same vehicle next year, with an unexpected increase in taxation.The employee may have made a different election if he knew of these proposed tax changes.Let’s not forget the effect of the ever increasing price of vehicles, pre-packaged with maintenance plans, and the newly introduced carbon tax on new vehicles.
Source: By Ettiene Retief, Chairman of Tax Committee, SAIPA (Tax Proffessional)